0

Entrepreneurship requires balancing unbridled optimism with delusional foolishness. Most entrepreneurs are mocked and misunderstood until they are wildly successful, at which point the chorus changes from “good luck with that ‘business’, pal” to “I always believed in ya, buddy!”

Master of your Domain

There is an undeniable appeal to the notion of bootsrapping your company to success without venture capital. While bootstrapping has many advantages aside from control and ownership—such as being master of your domain and giving you the freedom to build your own Xanadu for all stakeholders—the reality is that the disadvantages may be greater. I speak from experience, having bootstrapped my own company, WatchMojo.

Yes, Mo Money = Mo Problems, but Money = Lifeline

Throwing money at problems is usually a short term fix. By lacking capital, you’re forced to tackle issues head-on and generate real solutions.

But with no safety net (let alone a warchest) on your balance sheet, you can’t really pivot if your business is hitting a wall. Even if you’re doing well, money is your lifeline, so lacking it may starve even the most promising of bootstrapped companies, preventing you from investing in growth or supporting your clients. So in a best case scenario, you’re operating with one foot on the pedal with another in the grave. You’re basically in a perpetual state of fund-seeking, which is far more distracting than being in fundraising mode.

Mind you, we only hear about the wildly successful pivots such as Groupon, not about the hundreds of pivots that fail. Undoubtedly, some of those earlier models may become successful with time; albeit not big enough by VC definitions.

Give equity to grow equity

Fundraising is an art, and in Silicon Valley, conventional wisdom suggests that you “raise as much money as you can”. I’ve heard both Marc Andreessen and Jason Calacanis say this and couldn’t help but imagine that Netscape investor Jim Clark said that to Andreessen, whom Calacanis heard it from and who is now passing it on to the next crop of entrepreneurs.

Except raising as much money—or diluting—as much as one can is good for investors but bad for entrepreneurs. No wonder investors say that! When you’re wandering in the desert for days, you would give anything for that first glass of water, everything after that is a bonus.

But this shines a light on another reality of value creation: you have to ensure that others want to see you succeed and prosper, and the only way to do that is to hand out equity; as John Doerr says “no conflict, no interest”.

Meet the Board: Your More Objective Bad Cop

Once you have investors on board, the board they assemble will come in handy when you need to make tough decisions. Knowing that you have a regular evaluation and review of the business’ operational and financial metrics helps you succeed, plain and simple.

It’s also helpful for the CEO to be able to play good cop to the board’s bad cop. Indeed, many CEOs lack an objective sounding board and have an emotional attachment to an idea which not only wastes money but more importantly, the best years of your life.

So while too many companies chase the flavor of the month at the behest of their investors, the board will push you until your business takes off or you need to pivot.

Psychological Price Floor

While businesses should be valued on their financials, the historical valuation that investors place on your company may play a role in at least determining a floor price in a worst case scenario or a framework, at least. Solely for purposes of illustration, let’s look at how two recent exits may have gone down.

In the case of Next New Networks, the company had raised $25 million in venture funding from prominent investors including Goldman Sachs. The company’s high burn rate offset their success in generating views. Not having yet cracked the code to monetize their audience, investors were wary of adding more money. They weren’t however going to write off their investment altogether either, so they may have insisted on a purchase price equaling what they had put in the company regardless of the P&L. Rumor has it that Google paid $25 million to allow preferred shareholders to recoup their investment.

In 5Min’s case, it had momentum and growing revenues, so when AOL came knocking, it’s possible that the sale price was a function of both its financials and its funding history. Let’s hypothesize that 5Min was generating $10 million in revenues; with a 3x multiple it was offered $30 million – too little for 5Min investors to accept. But having raised $12.8 million over three rounds, it’s perfectly plausible that the final $65 million acquisition price was driven more by a desire to secure a 5x return on the money invested. Or, assume the VCs had 40% of the company, meaning a weighted valuation of $32 million in exchange for that $12.8 million; a 2x return on that valuation would yield approximately $65 million. I am clearly making the numbers up, but you see how one’s financing history may affect the final sales price.

Conversely, I have been told at least a dozen times that not having raised any venture capital values my company at a discount.

The Perception Problem: Red flag?

Moreover, not raising money from professional investors is—in all honesty—a potential red flag. It’s rare for an entrepreneur to run a business and spend millions of dollars without having any outside help. When that is the case, it’s a normal reaction to wonder: why? Why hasn’t outside money been raised? It’s unfair, but saying that it’s never come up would be a lie.

No Sympathy Points

Ultimately, while you may score extra points for building a large business despite being bootstrapped, you don’t actually score many points for running a small business if you have avoided venture capital, even though 99.9% of VC-funded companies wouldn’t exist or last as long as yours if they didn’t have VC funding to rely on.

The cliché is that it’s not the destination that matters, but the journey. Sure, maybe in Bullshitistan. In the sports and business world, it’s all about the outcome. No one remembers the score, let alone how the teams played the game, they remember who won, even if it means giving in to greed and resorting to bad behavior.

When it’s said and done, you can own 100% of a lemonade stand or 1% of Coca-Cola. While these are extreme polar opposites and a middle ground does exist, you have to understand that neither approach to building a business comes without its share of problems and drawbacks. In some ways, you build a business despite bootstrapping or raising VC, and not because of it.